U.S. stock market finds reason for cheer in crude-oil rally

Analysts point to $80 to $85 a barrel as tipping point to downside for equities

By

KateGibson

NEW YORK (MarketWatch) -- The U.S. stock market on Wednesday followed the price of crude, with oil helping drive sentiment among equity investors, who historically have had an opposite reaction to rising energy costs.

"As energy demand starts to increase, that's good for the economy, at least initially," said Mike Zrembski, senior commodities analyst at OptionsXpress.

"In the past, traders would view higher energy prices as a negative for corporations, since their input costs increase," he said, adding: "It's only recently that they see it as a positive."

The major stock indexes erased early losses to advance solidly into positive territory after crude futures climbed in the wake of data illustrating a large and unexpected decline in U.S. crude-oil inventories.

"We initially saw stocks lower on the day, and crude holding steady, then we got this bullish inventory data, and in this case it looked like crude was leading, since once crude started to rally, stocks followed as well," Zrembski said of the turn higher.

On the New York Mercantile Exchange, crude-oil futures for September delivery finished at $72.42 a barrel, the highest level for a front-month contract since June 12.

The rally came after the Energy Department reported crude supplies fell by 8.4 million barrels last week. Analysts surveyed by Platts had expected a rise of 1.1 million barrels. Read Futures Movers.

"Oil's been in many respects the most sensitive barometer of global economic activities, so it leading the market higher probably makes sense nowadays," said Jack Ablin, chief investment officer at Harris Private Bank.

Breaking point

"They move in synch until oil gets above $80, and then they move in opposite directions. The last time oil ran up, it seemed to be the market's friend until at some point it became a tax," Ablin added.

Should crude hit $80 to $85 a barrel, it would "take the steam out of an economic rally. We're not there yet, but we're getting close," said Zarembski.

"It's more of an anomaly we're seeing; it used to be the opposite," said Zrembski of equities and crude prices moving in the same direction.

The turn in crude also helped lead to an about-face in the price of gold, another asset class that recently has deviated from its norm and moved more or less in unison with the equities market. Read Mark Hulbert's column.

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